Foreigners Still Buying US Assets

Today the US Treasury released the latest statistics on international capital flows into the US, covering the month of November 2003. It shows a few interesting and surprising things.

1. Foreign private firms and individuals increased their purchases of US stocks and bonds in November. In fact, through Nov 2003 private net purchases of stocks and bonds totaled $575bn, up from $511bn in 2002. This surprises me, since I expected that the falling dollar was in response to weak private foreign demand for US assets. However, foreigners were still gobbling up US stocks and bonds in November. This suggests that the fall in the dollar may be due more to speculative activity in short-term investments rather than due to a major shift in long-term investor sentiment.

2. Foreign central banks continued accumulating US government bonds, buying a net of about $19bn during November. However, nearly all of this is accounted for by Japan alone. Japan’s central bank now owns over $525bn worth of US government bonds, up from about $385bn at the beginning of the year. (See chart below.) This is a stunningly massive quantity of US government bonds under the control of one institution. Good thing they’re on our side.

3. China’s central bank has not been accumulating large amounts of long-term US government bonds – contrary to what I expected, given their massive increase in foreign reserves. Together, China and Hong Kong have only added about $30bn in US government bonds to their portfolio this year. (Again, see chart below.) This creates a bit of a puzzle: where is China putting all of their dollars, if not in US government bonds? Is it all in short-term assets such as cash and T-bills?

It’s an interesting report. I need to take a closer look at it and think about it some more, but my preliminary conclusions are to be less worried about a significant drop-off in the willingness of private foreigners to lend in the US right now, to be more perplexed about China’s reserves, and to be more sanguine about the possibility of a huge sell-off in US government bonds this year, since I think Japan is much less likely to do that than China would be.